With oil hovering at record levels, it is hard to believe that in 1999 the Economist was warning of the dangers of cheap oil. From the magazine’s March 4th, 1999 issue, when oil had plummeted to around $10 a barrel.
“Yet here is a thought: $10 might actually be too optimistic. We may be heading for $5. To see why, consider chart 1. Thanks to new technology and productivity gains, you might expect the price of oil, like that of most other commodities, to fall slowly over the years. Judging by the oil market in the pre-OPEC era, a “normal” market price might now be in the $5-10 range. Factor in the current slow growth of the world economy and the normal price drops to the bottom of that range.”
They go on to write,
……..”The six biggest American oil firms posted grim fourth-quarter results for 1998: their after-tax profits fell by 90%, or $4.8 billion, compared with the same quarter a year earlier. The recent mergers of BP with Amoco and Exxon with Mobil mark a new round of consolidation in the industry. A big motive is to take costs out of the business: Exxon-Mobil for example, expects to save $2.8 billion from its merger. With its own reorganisation and internal streamlining, Shell is hoping to save $2.5 billion a year. “
And more.
In Venezuela, where production costs are lower, the bursting of the oil bubble has helped to propel a populist military man, jailed for two failed coups in 1992, into the presidency. Prolonged low prices could trigger social explosions in several other unstable producing countries.
Oil at $5 a barrel? Plummeting oil company profits? A reference to Hugo Chavez without naming him explicitly? It is amazing how much market conditions, and perceptions, can change in in less than a decade. All of those investors who thought they were smart buying oil company shares in 2007 were not nearly as smart as those doing so in 1998.
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